Nippon Life India Asset Management Limited has decided to limit the subscription of units in Nippon India small cap fund (scheme) with effect from July 7. It is an open-ended equity scheme predominantly investing in small-cap stocks.
According to the Nippon India Mutual Fund’s notification, “Fresh, additional subscriptions, switch-ins will not be allowed or accepted at any point of time till further notice, from the effective date. Fresh registrations through Systematic Investment Plan (SIP) without initial investment, Systematic Transfer Plan (STP), or other special products will continue with a limit of Rs 5 lakh per day per PAN.”
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Amol Joshi, Founder of Plan Rupee Investment Services, said, “Small-cap stocks have run up recently. Small-cap 250 index is up more than 25% in the last four months. This recent as well as robust past performance of small-cap funds has attracted inflows into funds and scheme AUM has ballooned past Rs 30,000 crore. Looking at valuations and fresh opportunities to deploy funds, the fund manager wishes to deploy the additional corpus gradually instead of in a lump sum manner. Hence, lumpsum & switches are restricted & only SIP & STP investments will be allowed.”
Over the past week, small-cap funds have been in the news because two funds in this space (TATA Small Cap and Nippon Small Cap) have placed restrictions on fresh inflows into these funds. This is typically a very fund-specific decision since it depends on a number of factors, including the size of the fund itself and the AMC’s ability to deploy fresh inflows comfortably.
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Mayank Bhatnagar, Chief Operating Officer, FinEdge, said, “It is neither indicative of any sort of overvaluation within the small-cap space as a whole nor representative of a stance taken by the mutual fund industry. In fact, data shows that only a specific segment of small caps is overvalued -within the NIFTY Small Cap 250 index, stocks held by mutual funds have an average PE ratio (a broad indicator of overvaluation) of 58X. In contrast, the others have a PE ratio of 25X, indicating that investment opportunities are still left on the table.”
He further said, “We are witnessing history repeating itself—that is, unadvised DIY investors are rushing into small caps based on short-term outperformance. This happens when investors chase returns without clearly defined goals, which inevitably leads to poor outcomes. To create wealth from equities, one must avoid the tendency to invest based on short-term past returns and adopt a systematic, disciplined, goal-based investing approach instead.”
The limit on the subscription of units of the scheme is being proposed to facilitate gradual deployment of the corpus in order to align with the nature of small-cap investing. The step is warranted considering the recent sharp rally in the small-cap space and increased investor participation through high-ticket investments, which would be in the best interest of existing unit holders and appropriate for incremental investments, as per the notification.
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The abovementioned restrictions will not be applicable for investments mandated as per regulatory requirements, i.e. Alignment of interest of Designated Employees of AMCs with the Unitholders of the Mutual Fund Schemes & mandatory contribution by AMC in its schemes. Moreover, the restriction mentioned above will not affect SIP, STP, or other special products registered before the effective date and the unitholders under Dividend Reinvestment Option.
“Existing investors in small-cap funds need not worry or take any short-term decisions based on these events. Remember, timing the market is impossible, and there is no predicting how long an asset class can keep going up once it is gathered momentum. Small-cap funds are meant for long-term goals that are 10 years or more away, and investors in these funds must be ready to weather many such cycles in order to succeed. If your goals are still a long way away, remain invested and continue your SIPs if your fund allows it. If you need access to your capital within the next couple of years, begin de-risking your funds systematically over the next 12-18 months,” said Bhatnagar.
